An estimated 49 million Americans depend upon $2.7 trillion in employee benefit pension plan assets that either aren’t fully audited or get a meaningless annual certification of their value, according to the Department of Labor inspector general.
The assets are held by about 65,000 plans regulated by the Labor Department’s Employee Benefits Security Administration.
The custodians of those plans often perform little more than “record-keeping services,” rather than annually verifying the integrity of the assets, the IG said.
The problem is a result of two factors: A loophole in federal regulation that the IG has since 1984 recommended be closed and a huge change in how investment assets are held by pension plan administrators, according to the IG.
The loophole allows pension plan regulators and administrators to accept what are known as “limited-scope audits” that “prevent plan auditors from providing assurances to plan participants and beneficiaries regarding their plan’s financial statements,” the IG said.
The result is that “these limited-scope audits weaken assurances to participants and may put [certain] assets of retirement plans at risk because they provide little to no assurance regarding the existence or value of those assets,” according to the IG.
The problem is particularly acute, the IG said, for plans that hold $1.1 trillion in “complex trust arrangements and hard-to-value assets held and certified by custodians.”
Before the digization of financial transactions, auditors could typically depend upon an actual piece of paper attesting to the ownership and face value of assets like stocks and government bonds, which made up the bulk of most employee pension benefit plans.
“Since 1974, the investment environment has radically changed. Stocks and bonds are no longer printed on paper. The vast majority of financial instruments exist only as a diffuse collection of bits and bytes in a vast array of computers around the world. Physical custody is no longer the model relied upon to prove existence,” the IG said.
Consequently, the IG said, “plan auditors cannot walk into a computer room some place in the world and demand to count the number of bits and bytes that represent the plan’s assets.”
At the same time, the IG said, “plans have increasingly shifted assets from traditional investments into hard-to-value (HTV) assets and non-traditional investments, such as hedge funds, private equity funds, and venture capital funds, among others.”
In addition, the fact federal regulators do not make public their findings when auditing pension-plan asset custodians, thus leaving plan participants and the public “no way of knowing when examinations reveal problems with custodians.”
Go here for the full DOL IG report.
Mark Tapscott is executive editor of the Washington Examiner.
